FINAL CIVL2812 Semester Exam 2021 Take-home short release type D
This is an open-book exam.
Date of exam: 23/11/2021
Start time of exam: 1:00pm
Duration 150 minutes plus 10 minutes reading and uploading.
50 MARKS.
WRITE your answers on white papers with blue or black pen, do not use pencils.
SHOW YOUR FINAL ANSWERS CLEARLY IN A FRAMED BOX e.g



Question 1 (2 marks)
An energy company is considering developing an LNG fuelled power station. The project will require
an initial investment of $130 million. Operation and Maintenance (O&M) costs are expected to be $5
million per year and revenues are expected to be $34 million per year. The energy company’s MARR
is 12% per annum, compounding quarterly.
(a) What is Simple Payback Period for this project? (1 mark)
(b) What is the Discounted Payback Period for this project? (1 mark)

Question 2 (3 marks)
A project has the following expected cashflows:
• An initial investment of $250,000 at time zero
• Annual revenues of $65,000 starting at the end of year 3
• Annual expenses of $20,000 starting at the end of year 3. These expenses are expected to
increase by 3% per year until the end of year 7, after which they will remain constant.
• A salvage value of $55,000 at the end of the project’s 10 year life
• A MARR of 12% per annum

(a) Draw the cash flow diagram for the above cashflows (1 mark)
(b) What is the Present Worth of these cashflows at time zero? (1 marks)
(c) What is the Annual Worth of these cashflows across the project’s useful life? (0.5 mark)
(d) What is the Future Worth of these cashflows at the end of the project? (0.5 mark)

Question 3 (2 marks)
You are considering investing $X in a fund that will provide you a return of 8% per annum,
compounding monthly. How many years will it take for your investment to be worth $8X?
IRR=17.3%
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Question 4 (5 marks)
A machine can be purchased for $165,000 and depreciated over three years to a book value of $0
using the Straight Line method. The machine will generate revenues of $65,000 (time zero dollars) per
year, with these revenues starting at the end of year one and increasing by 5% each year. The
Operation and Maintenance (O&M) costs are expected to total $15,000 (time zero dollars) per year
and are expected to increase by 9% per year. The firm’s effective tax rate is 30%, and its after-tax
MARR (im) is 26% per year.

(a) Perform an actual-dollar (A$) analysis and determine the annual After Tax Cash Flows of
the above investment opportunity. Use a life of three years and work to the nearest dollar.
(3 marks)
(b) What interest rate would be used for discounting purpose? (1 mark)
(c) Based on your results in (a) and (b), what is the Present Worth of the machine? (1 marks)

Question 5 (4 marks)
A Monte Carlo analysis reveals that the following probabilities for the Present Worth of a project:
Present Worth Probability
-$10,000 0.05
-$5,000 0.10
$0 0.05
$5,000 0.15
$10,000 0.15
$15,000 0.25
$20,000 0.25

(a) What is the expected value of the Present Worth of this project? (1 mark)
(b) What is the variance of the Present Worth of this project? (1 mark)
(c) What is the standard deviation of the Present Worth of this project? (0.5 mark)
(d) Provide 2-3 sentences explaining your results from part (a), (b) and (c). What do these
results mean? (1.5 marks)

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Question 6 (4 marks)
Mary is considering purchasing a new work utility vehicle (ute). The purchase price, expected
maintenance costs, expected salvages value and useful lives of two different models are detailed
below. Mary’s cost of capital is 12% per annum.
Model A Model B
Purchase price $65,000 $45,000
Annual maintenance cost $5,000 $10,000
Salvage Value at end of useful life $25,000 $15,000
Useful life 10 years 5 years

(a) What is the market value of each ute at the end of year 5? (2 marks)
(b) Assuming that Mary will sell the ute at the end of year 5, which ute should she select? (2
marks)

Question 7 (3 marks)
The NSW Government is considering a project that will require an investment of $6 million.
However, it will provide benefits to the public at a value of $920,000 per year. Annual maintenance
expenses are anticipated to be $104,000. The project can be assumed to have an infinite life (N = ∞).
If the NSW Government’s MARR is 10% per year, determine whether the project is economically
attractive using the conventional Benefit-Cost ratio.
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Question 8 (6 marks)
The editor of a fashion magazine is considering which model to place on the front cover of the
December 2021 magazine issue. The editor has shortlisted three models and has determined the
ratings of each model in five key attributes. The editor has also determined the importance of each
attribute by giving each attribute a certain weighting. Determine which model should be selected
using each of the below methods. Please provide concise reasons/steps for each method:
(a) Dominance (1 mark)
(b) Satisficing (1 mark)
(c) Disjunctive resolution (1 mark)
(d) Lexicology (1 mark)
(e) Additive Weighting (2 marks)
Attribute Attribute
Weight
Model A
(Rachel)
Model B
(Suzie)
Model C
(Helen)
Acceptable Range
Model fee 0.33 $30,000 $29,000 $31,500 $29,000-$35,000
Disposition* 0.18 89 96 94 94-100
Quality of shooting portfolios* 0.28 89 96 94 89-100
Physical attributes* 0.48 92 93 91 92-100
Popularity* 0.26 86 96 87 87-100
*Higher = better

Question 9 (3 marks)
Adani Group plans to launch two new mines in Australia. Adani Group has estimated the costs of
drilling and establishing the mines at $12.7 billion Australian Dollars, 6 years from now. The
company plans to establish a fund in an Australian bank. The fund is expected to earn a return of
18% per year (a rate relative to the Australian Dollar - AUD). How much will the company have to
set aside now in U.S. dollars if it is estimated that U.S. dollars will be devalued at an average of
4.25% per year and the present exchange rate is 1.57 AUD per U.S. dollar?

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Question 10 (4 marks)
Write a maximum of 2-3 sentences to address each of the below questions:
(a) What is a company’s MARR and what are some factors that will influence a company’s
MARR? (1 mark)
(b) What is the difference between an asset’s book value and an asset’s market value? (1 mark)
(c) A company buys an asset for $10,000 and depreciates it by the same amount each year for 5
years to a book value of $0. What method of depreciation is this company using? What is the
impact of depreciation on this company’s profit and tax payable? (2 marks)

Question 11 (3 marks)
An existing asset has a market value of $87,000. It is expected that the asset’s market values at the
end of the next three years are MV1 = $76,000, MV2 = $60,000, MV3 = $40,000. The annual expenses
are $18,000 in present (year zero) dollars, and these expenses are estimated to increase at 4.1% per
year. The after-tax MARR is 10% per year and the tax rate is 30%. The best challenger available has
an economic life of six years, and its EUAC over this period is $44,210. Based on this information and
a before-tax analysis, when should you plan to replace the defender with the challenger?

Question 12 (5 marks)
A company is potentially going to receive a government grant to assist with financing a project. The
grant will impact the project’s useful life, revenues, expenses, operation and maintenance costs
(O&M) and the required capital investment from the company. The company’s after tax MARR is
12% and it pays the Australian company tax rate of 30%.
Based on the probability that the company will receive the grant, the before tax cashflows for the
project have the following probability distribution:
Probability Annual
Revenue
Annual
Expenses
Annual
O&M
Capital Investment Useful Life
0.15 $500,000 $200,000 $60,000 $640,000 4 years
0.35 $700,000 $250,000 $75,000 $720,000 6 years
0.35 $900,000 $350,000 $105,000 $990,000 8 years
0.15 $1,100,000 $400,000 $120,000 $1,100,000 10 years

(a) Determine the expected value of the project’s revenues, expenses, O&M costs, capital
investment and useful life (1 mark)
(b) The company uses the 200% declining balance method of depreciation, with switchover to
straight line depreciation. The company will sell the assets from the project for $60,000 at
the end of the project’s useful life. Using the expected values determined in part (a),
determine the after tax cash flows over the life of the project (3 marks)
(c) Determine the after tax present worth of the project (1 mark)

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Question 13 (4 marks)
Management of your company is concerned about the level of risk it is taking on a certain project.
Your team has determined the most likely investment costs, market value at the end of the project’s
life and the annual savings expected as a result of the investment.
To address management’s concerns, you have carried out a sensitivity analysis on the project. The
output of your analysis is shown below.

Write a 4 bullets point summary that summarises the analysis you have conducted and explains the
outcomes of your analysis to management.
Question 14 (2 marks)
You have received the following email from a senior manager at your company, who requires an
urgent response. Write an appropriate response to Sally.
RE: [Urgent] Transport for NSW Platform – IRR???
Hi, A client (Frank from Transport for New South Wales) is looking to build a train station platform
out of either steel or concrete, and has sought our advice on the selection between the two
alternatives. A consultant has advised Frank that the steel alternative has an IRR of 15% and the
concrete alternative has an IRR of 18%. Frank doesn’t understand what this means and doesn’t know
which project should be selected.
Can you please draft me an email I can send to Frank to summarise what this means and outlines the
next steps that should be taken to select one of the two alternatives? Frank doesn’t need any
calculations. 4 dot points should suffice.
Regards, Sally
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